Preparing your finances so that you can focus on what matters most.
We created this to outline our philosophy and approach to how we handle investments. It’s important to remember that investments are only one component of a strong financial plan. Insurances, estate plans, and tax strategies are other significant factors in your financial plan that we don’t cover here. We’ll walk through our thought process in building the Foundational Investing™ methodology and what it means for you and your retirement.
With the lack of retirement assistance from government and corporations, it is more important than ever for you to take retirement in your own hands. Pensions are nearly non-existent and Social Security is meant only to bridge the gap between your savings and income needs. Since retirement is now your responsibility, we believe having a plan is the best strategy to live greatly in retirement.
While retirement planning is a modern idea, the concept of retiring has been around for thousands of years. Retirement, until recently, was always supported by government-run defined benefit plans or pensions. They first appeared in the Roman Empire in 13 BC, when Emperor Augustus began paying pensions for military leaders who had served for 20 years. Since that time, throughout history, governments have provided pensions for the military leaders and troops, but it wasn’t until 1889 when the minister-president of Prussia, Otto von Bismarck, introduced a government-run pension for anyone above the age of 70. It was the first time in history that any citizen of a country was eligible to retire if they lived to 70. At the time though, the average life expectancy was 40 years. So as you can imagine, a highly select few were able to take advantage of the pension. Meanwhile, American Express started the first private-sector pension fund in the U.S.A. By 1929, there were 397 private-sector plans that operated in the U.S.A. and Canada.
While pensions gained popularity, retirement was still not a common pursuit for most in the 1920s. Following the industrial revolution, America found itself increasingly urbanized as the extended family support system began shrinking and average life expectancy started growing.
The Great Depression had a profound impact on the living expenses of millions of Americans. As this depression wore on, there were increasing political and social shifts that advocated for a government-run system to support the elderly who weren’t as able-bodied to work in factories.
Under the mounting economic and social pressures, President Roosevelt signed the Social Security Act on August 14, 1935. The new act would pay a fixed monthly benefit to a retired person over 65. As soon as the act was signed into effect, there was a significant effort to issue Social Security numbers to the millions of workers by January 1, 1937.
Monthly benefits started paying out on January 31, 1940. Today, Social Security has become a foundation in American retirement. Approximately 1 of every 7 Americans are supported entirely by Social Security, and it could account for nearly 40% of the average American’s retirement income. As of the time of this writing, many are concerned about Social Security’s solvency because the Social Security trust fund is set to run out in 2035. Only minor changes are needed and legislators are working to fix this so beneficiaries’ incomes are not affected. If you want to learn more, check out our article on why we think this isn’t something to worry about.
From the 1940s to the 1970s, retirement was funded by employers through pensions, and the rest covered by Social Security. During that time, however, there was little regulation on pensions and as a result, some corporations mismanaged them. Many companies used the pension investments as a way to avoid paying corporate taxes, and then used that fund to invest back into shares of their own company, or into other more lucrative and speculative investments.
The continued mismanagement of pensions resulted in a significant legislative shift. On Labor Day 1974, President Gerald Ford signed the Employee Retirement Income Security Act. This new law overhauled the entire pension system. Over the following years, regulators continued to develop new laws and regulations to address the finer details, making pensions less and less desirable for private firms going forward.
Congress passed the Revenue Act of 1978 which included a provision that allowed employees to avoid being taxed on deferred compensation. This provision, Section 401(k), was originally created as a tax-advantaged method to compensate high-earning employees. In 1981, the IRS allowed employees to fund their own 401(k) through payroll deductions. This boosted the popularity of the 401(k). In the same year, Congress set up Individual Retirement Accounts (IRAs), SIMPLE-IRAs, and ESOP options. Then in 1997, the Roth IRA was introduced by the Taxpayer Relief Act, enabling you to have further control over your own retirement.
All of this together ushered in the shift from a company- or government-supported retirement, to a retirement that you must navigate on your own. And navigating the financial landscape on your own is a challenging endeavor. It’s part of the reason we exist. To walk with you, as a resource and trusted partner, through the complex financial world.
Investing for a stable retirement while remaining open to the gains of the market provides a unique challenge. And over the years, we’ve developed a framework that helps us think through this challenging ecosystem.
But first, let’s dive into our five key investing principles.
Each of these principles is rooted in the findings of academic research and has been proven true in the real world. Most of them are now accepted as industry best practices, but they were groundbreaking when they were first discovered, leading to Nobel Prizes for several of the researchers.
With the mounting pressures of creating stability in retirement while maximizing portfolio gains to make your money last longer, we use these principles as the framework of your plan. Whether you work with us or someone else, we believe these principles should exist in any retirement scenario.
Our entire focus is to inspire you to pursue your retirement aspirations. We call this living greatly. We do this through carefully crafted plans, uniquely designed for you, as you are in or near retirement.
The first thing we do is spend time with you, working to uncover everything you hope to accomplish in this next stage of your life. Next, we’ll move on to more practical elements. We will work to understand things such as your income needs and the timeline of your retirement, as well as evaluate your current assets, and more.
Finally, this is met with a conversation about spending. We believe that clarity on how you spend is the single most powerful tool in your retirement because it allows you to know exactly how much money you need, or don’t need.
And when we say spending, we don’t mean just expenses. Spending includes your aspirations, such as a family trip, your dream house, as well as charitable giving. Having a clear understanding of your cash flow allows you to create a sound withdrawal plan, which then allows you to build a sound investment plan.
Research has shown that diversifying is a way to reduce volatility, limit risk, and create opportunities for long-term capital appreciation. And true portfolio diversification must include a significant number of uncorrelated asset classes.
This is not simply a mix of bonds and stocks but a strategic allocation of asset classes that include large-cap, small-cap, mid-cap, emerging markets, real estate, and others. History has shown that in a rolling 7-year period, it is highly likely an asset class will experience a downturn. Diversification among many asset classes protects you from the downside of one class and also expose you to gains from another.
Another form of diversification is segmenting your portfolio based on time horizons when you plan on needing the money. This allows you to spread the risk over different time buckets, with higher risk investments in longer time horizons, and lower-risk investments in the nearer term. This combined with a strategic investment allocation can significantly reduce your risk and create an opportunity for capital appreciation.
Taxes are one of the largest threats to maximizing your portfolio gains. We utilize several distinct approaches to minimize your tax burden now—and throughout retirement. We look at the accounts you’re using to fund retirement, the order in which you withdraw from those accounts, how often you sell your ETFs, mutual funds, or stocks, and how to take advantage of lower tax brackets to reduce required minimum distributions (RMDs).
We believe in withdrawing from your accounts strategically in order to minimize ordinary income tax as well as minimize overall capital gains. Often, the order in which you withdraw from your accounts can affect the spending power you have throughout retirement. Therefore, it’s vital to evaluate the best withdrawal strategy in order to reduce your tax burden while maintaining the greatest principal in your account for continued growth.
Some portfolios will have a lot of activity in them creating many short-term capital gains that are considerably less favorable from a tax standpoint than long-term capital gains. We believe in holding minimal cost investments for the long term. We focus on using low-cost ETFs and tax-efficient mutual funds for a diversified and low-cost option that limits capital gains. This enables us to maintain consistently lower tax rates for our clients and eliminates the unnecessary tax burden of short-term capital gains.
We also believe in reducing your taxes paid in the future, not just today. At the time of this writing, we’re living in the lowest tax rates in modern history. Therefore, it’s often advantageous to pay taxes upfront to reduce future required minimum distributions.
401(k)s, traditional IRAs, and the majority of retirement accounts have required minimum distributions (RMD), which is a government-required specific withdrawal amount that increases each year after turning 72. We consistently find our clients will be in a higher tax bracket in retirement because of the RMDs. Often, it’s more tax-efficient to do Roth Conversions at a known tax bracket today, to reduce taxes in the future at an unknown tax bracket.
However, these current low tax rates are set to increase every year from now until 2025, making this strategy even more compelling to consider. If you’d like to learn more about this, check out our short video class where we’ll show you in more detail how it works.
Although investing is not free, it is vital to keep costs low. Many mutual funds have an expense ratio of 1–2% and a difference of a 1% fee can have a dramatic impact on your portfolio. Also, research suggests you are more likely to pick a winning investment just by the expense ratio alone than by any other metric. This is because you are paying for the investment every year, regardless of whether the investment increases or not.
Modern Portfolio Theory (MPT) has shown that no one can time the market. Even the most highly qualified fund managers have been unsuccessful at market timing. Additionally, using funds that require a fund manager to actively make trades can often incur higher costs. Research strongly supports that choosing passive funds with lower fee structures have a better chance of outperforming actively managed, higher-cost funds. This allows you to limit the amount of cash held in the fund, maintaining market exposure, and increasing the chance of long term gains.
In short, we choose investments not based on a fund manager’s performance, but with every piece of your financial picture in mind.
When an asset class significantly outperforms another (and when one significantly declines in value) it’s vital to take the earnings from the top performer and buy into the underperforming fund. This approach purchases the different asset classes during the dip, setting you up to receive the greatest gains over time. This proven strategy minimizes the overall risk in your portfolio and increases its efficiency.
We created the Foundational Investing™ method through our work with clients in and near retirement. After hearing the concerns and dreams of many, we deconstructed and rebuilt the best components from several advanced investing frameworks to create our Foundational Investing™ method. Our primary goal is to equip all of our clients to be more confident as they’re entering or in retirement.
We created our method by merging two leading financial planning methodologies. The first step is to make sure all needs are covered. We call this establishing an income floor with upside. It’s essential to make sure your day-to-day expenses are covered. There’s research to support that you’re actually a better investor when you know your necessities are already taken care of.
This is accomplished by establishing a time frame for liquidity needs and creating an income stream out of your accumulated assets. Though every situation is unique, we usually find our clients need 6–12 months of cash, except in the case of a planned large purchase such as a new home remodel, new car, investment in a business, etc. From there we analyze other potential income streams such as Social Security, pensions, annuities, bonds, and dividends. All of these combine to ensure your basic needs are covered.
The second step is to look at the future expenses you have and coordinate your investments to the time-horizons of your goals. We use a methodology called time-segmented investing to ensure you have the best returns with the lowest possible risk for your goals.
Taking the goals that you have in the coming years, we section them out by time-horizons. This allows us to invest in a more aggressive position for the goals that are further away, and more conservatively for the goals that are closer. This gives you the ability to be exposed to the market upside, without any unnecessary losses that could prevent you from accomplishing your goals.
Additionally, each segment is mapped to your personal measurement of risk. We calculate this through an assessment to determine your personal comfort with risk so that all of our investments match your risk tolerance.
From there, we stress-test your portfolio against the market, looking at the risk your portfolio can withstand while setting you up to accomplish your goals in retirement. This gives us the ability to identify the risk capacity, or how much your portfolio can be exposed to risk. The risk capacity allows us to understand if your dreams are achievable and what your portfolio will look like in the years to come. Finally, we calculate how much required risk you must take in order to achieve your goals.
Foundational Investing™ creates a cohesive and powerful method to equip you with consistent and reliable income in retirement, without losing on the economic opportunities in the long-run.
Through the use of advanced technologies, we’re able to evaluate and identify the best strategies for each individual as they’re nearing and in retirement—and then adjust as your needs and goals change over time. Each and every plan we create is custom-crafted to fit who you are and the dreams you have for retirement. We’ve seen it work for our clients in a profound way. All of this comes together to equip you to live greatly in your next adventure.
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